Mr.ABC gifted R.3.00 lacs to his wife. His wife invested the amount in a FDR for 15 months @ 10% on 01.04.06. The interest on FDR has been clubbed in Mr.ABC for the year 06-07 and 07-08 and returns filed. The FDR matured on 30-06-07 and the proceeds were invested in Gold. The Gold was sold on 01.04.08 for Rs.3.00lacs and sale proceeds was again deposited for six months @ 10%. How long the clubbing provisions are to be applied and income to be clubbed in Mr.ABC’s income.Whether the same law applies for Gift to HUF also, in place of spouse.
T V RAO, THANE
The clubbing provision was introduced to stop the diversion of income. A husband may transfer certain assets to his wife , in the hope that his wife who does not have any income , can save him tax by claiming basic exemption allowed to one individual. Still the money remains with the family.To stop this practice , section 64 was introduced to provide for clubbing provisions. Therefore, if a money is gifted to wife , and wife earns interest income on such gifted money kept in FDR , such interest income is to be clubbed with the income of the husband.
How long?
While the first transfer of asset which generates income is clubbed u/s 64 , the income out of application of income is not covered. Therefore, if the interest income is deposited in fixed deposit, the interest on such a deposit can not be clubbed.
Case law in this regard is Mukerjee vs CIT 116 ITR 554 (Cal) wherein the Calcutta High Court held
he section, as has been rightly pointed out by the Supreme Court, is a section which must receive strict construction because it makes the income of one taxable as income of another. The income if estimated as due to the accretions cannot be said to be arising either directly or indirectly from the assets transferred. The income arises directly and no question of indirect accrual of income arises here. But the income does not arise from the assets transferred. The income arises from the accretions to the assets transferred. The section does not warrant the inclusion of income arising from the assets transferred as also with the accretions thereof. In view of the findings of the Tribunal, with which we are in agreement, that the wife was the benamidar of the assessee and there was no scope for application of s. 64, this controversy does not call for determination in the instant case. We would answer, in view of the facts and circumstances of this case, that the Tribunal was right in holding that s. 64(iii) was not applicable.
Other case laws to refer are
- CIT vs Rajan 252 ITR 126
- Popatlal vs CIT 36ITR 577
So , the interest @ 10 % attributable to the interest earned on FDR shall be tax in wife’s hand only.
Same rule also apply to property gifted to HUF.

from the question it is understood that the money gifted is transformed to different asset classes over a period of time. The receipitent might have clubbed the gift money with other fin assests. How long the gift amount has be tracked for arriving income generation out of gift money. Is not difficult to keep track, when there is transfermation in asset class/type. Please look this angle and guide.